•Describe the relevant participants that enter into contracts with the firm. Ide
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Question
•Describe the relevant participants that enter into contracts with the firm. Identify some items that might appear in each of the relevant participants’ utility function. The frequently stated goal of the firm is to maximize the expected value of the stock. Use utility theory to explain how this may not be the goal of the other participants that enter into contracts with the firm and how shareholders can reduce this problem. Use utility theory to explain the unethical behavior of some managers. Use utility theory to explain how the unethical behavior could be reduced. Describe agency conflicts that exist within the firm and how corporate governance may mitigate the adverse effects on the value of the firm.
Explanation / Answer
Relevant parties that enter into a contract are :-
--- legal entity employing sufficient number of people , with all requisite competence to validate projects or reduce emissions
---- presence of financial statbility
----- sufficient coverage to cover financial liabalities
---- Expertise in properly handling kyoto protocol rules
The above itmes will also appear in participant's utility function.
Expected utlity differs between parties entering into contract and shareholders play a major role in reducing the problem because some parties are only involved into environment protection whereas other party is into car manufacturing. So, a contract is made with the help of shareholdes between both of them where party one who is specialized in reducing pollution will help party 2 in reducing pollution.
Agency conflicts is always there as Principal is not aware of the things what is going on in the business. In this case, an audit firm may be hired to evaluate things and to present it to the Principal thereby reducing conflicts between both the parties.
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